Developer Workshop Proposed Modifications to Affordable Housing Inclusionary Requirements

May 24, 2021

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• Keyser Marston Associates, Inc. prepared an evaluation of the proposed modifications

• May 24th Developer Workshop

• June 8th Planning Commission Meeting, Informational Item only

• Return to Planning Commission, Date TBD, formal recommendation to Council required

• August/September 2021 return to City Council with a report and recommendation

Process

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• The City is considering modifying its affordable housing inclusionary program to deepen the overall level of affordability of for-sale inclusionary units.

• Obtain feedback from the Development Community

Purpose

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Requires new for-sale residential projects to either:

1) restrict 10% or 15% of total units at affordable sales prices to Moderate-Income households;

2) or pay a fee in-lieu of providing on-site units.

The City’s inclusionary requirements are codified in Chapter 14.04 of the City’s municipal code.

Current Requirement

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A. Under the first alternative, the Moderate-Income category would be stratified into two sub-categories, with a blended average price set at 100% of the Area Median Income.

B. Under the second alternative, the inclusionary requirement would include a component of Low-income units as well as a lower-price structure for Moderate-income units.

Alternative Program Changes

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• The additional financial cost to new for-sale residential projects to provide the proposed deeper levels of on-site affordable units; and

• Changes to current in-lieu fee levels that would approximate the cost of providing the proposed deeper levels of on-site affordable units.

Keyser Marston Associates, Inc. (KMA) Evaluation:

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HCD Income Table (Effective April 26, 2021)

Household size 1 2 3 4 5 6 7 8

Extremely Low

0-30% $34,800 $39,800 $44,750 $49,700 $53,700 $57,700 $61,650 $65,650

Very Low 30-50% $58,000 $66,300 $74,600 $82,850 $89,500 $96,150 $102,750 $109,400

Lower 50-80% $82,450 $94,200 $106,000 $117,750 $127,200 $136,600 $146,050 $155,450

Median $105,900 $121,050 $136,150 $151,300 $163,400 $175,500 $187,600 $199,700

Moderate80-120% $127,100 $145,250 $163,400 $181,550 $196,050 $210,600 $225,100 $239,650

California Housing and Community Development (HCD) income limits

Maximum Prices for Inclusionary Units:

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Maximum Home Prices of Inclusionary Units: Current Program

Number of Bedrooms In Unit

2 3 4 5 6 % of Units Set Aside

Projects Located Outside of Downtown

Upper End of Moderate Income (120% of AMI) 15% $581,842 $651,001 $704,718 $758,643 $820,738

Projects Located in Downtown

Upper End of Moderate Income (120% of AMI) 10% $581,842 $651,001 $704,718 $758,643 $820,738

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The City’s ordinance provides for some projects with approval by the City Council to make a payment in-lieu of providing on-site inclusionary units. The current in-lieu fee schedule is $19.70 per habitable square foot for for-sale projects outside of downtown and $13.20 per habitable square foot for projects located within downtown.

In-lieu Fee Payment

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The overall inclusionary requirement of 10% for downtown projects and 15% for projects outside of downtown would not change but affordability would be deepened.

Summary of Proposed Alternative Affordable Inclusionary Requirements

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Two bands of Moderate-Income units would be established. The first band would be priced to be affordable to households that earn up to 100% of the Area Median Income (AMI), the second band would be targeted to households earning up to 120% of the AMI.

Projects located outside of the Downtown would be required to set-aside 7.5% of units as “Median Income” units and 7.5% as Moderate-Income units (15%).

Projects located within the Downtown, would be required to set-aside 5% of units as Median Income units and 5% as Moderate-Income units (10%).

Median-income units would be priced at 90% of the AMI, and Moderate-Income units would be priced at 110% of AMI. The blended price of Moderate-Income units would decline from the current level of 120% of AMI to 100% of AMI.

Alternative A

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Adds a Low-Income component to the inclusionary requirement.

Projects outside of Downtown would be required to restrict 5% of their units to Low-income households, 5% to Median-income households and 5% to Moderate-Income households (15%).

Projects within the downtown would be required to restrict 5% of their units to Low-Income households and 5% of their units to Moderate-Income households (10%).

Low-Income units would be priced at 70% of the Area Median Income (AMI), Median-income units would be priced at 90% of the AMI, and Moderate-Income units would be priced at 110% of AMI.

The blended average level of affordability of the inclusionary units would deepen from the current program level of 120% of AMI to 90% of AMI.

Alternative B

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Alternative A: the blended average price for 3-bedroom inclusionary units located outside of downtown would be $521,600, which is approximately$129,000 less than the current maximum price for a Moderate-income three-bedroom unit.

Alternative B: the blended price for 3-bedroom inclusionary units located outside of Downtown would approximate $435,300, which is $216,000 less than the current maximum price for a Moderate-income three-bedroom unit.Low-income units would range in price from $232,500 for a two-bedroom unit to $339,400 for a six-bedroom unit.

Alternative A & B Pricing

Approach to Calculating In-Lieu Fees

Step #1Identify examples

of New Residential

Developments in Morgan Hill with published sales

data

Step #2Estimate the profit margin assuming a 100% market rate

project

Step #3Estimate the profit margin assuming a project with 10%

to 15% inclusionary units

Step #4The difference in profit represents

the cost to providing

inclusionary units

Step #5Convert the

reduction in profit to a cost per

square foot = the in-lieu fee

Sample Attached / Condo developments

Attached Townhomes Avg. Price Avg. SFBedroom

CountHomes offered

Price Per SF

Madison Gate $779,900 1,783 3 50 $437

Veneto $773,000 1,981 3.7 60 $390

The Gables $795,990 1,718 3.3 37 $463

Los Colinas $961,333 1,906 4 32 $504

Valencia $934,333 2,036 4 84 $459

Average $848,911 1,885 3.50 $4503 Beds $824,379 1,944 3 $4244 Beds $908,110 2,035 4 $446

Sample Detached Developments

Detached Units Developer Avg. Price Avg. SFBedroom

CountHomes offered

Price Per SF

Veneto Van Daele Homes $1,019,175 2,791 3 14 $365

Borello Ranch Estates Toll Brothers $2,346,852 4,477 4.3 107 $524

Average $1,683,014 3,634 3.64 $463

3 Beds $1,459,782 3,213 3 $454

4 Beds $2,186,245 3,830 4 $571

5 Beds $2,756,995 5,932 5 $465

6 Beds $2,765,995 5,921 6 $467

Proposed Maximum Inclusionary Home Prices

Maximum Price Bedroom Count

3.0 3.5 4.0 4.5 5.0

90% AMI $ 456,891 $ 475,988 $ 495,084 $514,285 $533,486

110% AMI $ 586,298 $ 610,569 $ 634,840 $659,216 $683,591

Average, 100% AMI $ 521,595 $ 543,278 $ 564,962 $586,750 $608,539

Calculation of In-lieu Fee – Attached Homes– Alternative A Inclusionary Requirements, Outside of Downtown

On-site Affordable UnitsTotal Units 100 Bedrooms 3.5Inclusionary Rqmt 15%

Market Rate Affordable TotalUnits 85 15 100SF 1,885 1,697 90%Price Per Du $848,911 $543,278

Transaction costs (3%) $25,467 $16,298Cost per DU $764,020 $721,999Price Per sf $450 $320Cost per sf $405 $426 105%

Revenues $69,992,712 $7,904,699 $77,897,410

Costs $64,941,692 $10,829,982 $75,771,674Fractional Fee $0 $0Profit $5,051,020 -$2,925,284 $2,125,737

All Market Rate Units

Total Units 100 Bedrooms 3.5

Inclusionary Rqmt 0

Market Rate Affordable Total

Units 100 0 100

SF 1,885 1,697 188,500

Price Per Du $848,911 $543,278

Transaction costs (3%) $25,467 $16,298

Cost per DU $764,020 $721,999

Price Per sf $450 $320

Cost per sf $405 $426

Revenues $82,344,367 $0 $82,344,367

Costs $76,401,990 $0 $76,401,990

Profit $5,942,377 $0 $5,942,377

On-site Compliance CostPer unit Per SF Total

100% Mkt. Rate Profit $59,424 $31.52 $5,942,377Profit W/ Affordable $21,257 $11.28 $2,125,737Difference $38,166 $20.25 $3,816,640

Per Affordable $250,000Per SF, all units $20.25

Per unit, all units $38,200% of Price 4.50%

Calculation of In-Lieu Fee– Detached Homes - Alternative A Inclusionary Requirements - Outside of Downtown

On-site Affordable UnitsTotal Units 100 Bedrooms 3.64

Inclusionary Rqmt 15%

Market Rate Affordable Total

Units 85 15 100

SF 3,634 2,726 75%

Price Per Du $1,683,014 $549,350

Transaction costs (3%) $50,490 $16,480

Cost per DU $1,514,713 $1,249,638

Price Per sf $463 $202

Cost per sf $417 $458 110%

Revenues $138,764,504 $7,993,038 $146,757,542

Costs $128,750,571 $18,744,568 $147,495,139

Fractional Fee $0 $0

Profit $10,013,933 -$10,751,530 -$737,597

All Market Rate Units

Total Units 100 Bedrooms 3.64

Inclusionary Rqmt 0

Market Rate Affordable Total

Units 100 0 100

SF 3,634 2,726 363,400

Price Per Du $1,683,014 $549,350

Transaction costs (3%) $50,490 $16,480

Cost per DU $1,514,713 $1,249,638

Price Per sf $463 $202

Cost per sf $417 $458

Revenues $163,252,358 $0 $163,252,358

Costs $151,471,260 $0 $151,471,260

Profit $11,781,098 $0 $11,781,098

On-site Compliance CostPer unit Per SF Total

100% Mkt. Rate Profit $117,811 $32.42 $11,781,098Profit W/ Affordable -$7,376 -$2.03 -$737,597Difference $125,187 $34.45 $12,518,695

Per Affordable $830,000Per SF, all units $34.45

Per unit, all units $125,000% of Price 7.43%

FINDINGS & RECOMMENDATIONSDOWNTOWN PROJECTS

There is a significant cost differential between providing inclusionary attached townhome / condominium units and providing inclusionary large, detached units. Restricted home prices are based on bedroom count and are the same for both townhomes and large detached homes, regardless of square footage.

Per Square Foot Cost of Providing Inclusionary Units: Within the Downtown

Detached UnitsAttached Townhomes and

CondosCost of Current Inclusionary Requirements $16.57 to $19.33 $4.00 to $7.00

Cost of Alternative A Inclusionary Requirements $21.07 to $22.97 $10.82 to $13.50

Cost of Alternative B Inclusionary Requirements $24.44 to $25.69 $15.84 to $18.69

FINDINGS & RECOMMENDATIONSOUTSIDE OF DOWNTOWN PROJECTS

There is a cost differential between providing inclusionary attached townhome / condominium units and providing inclusionary large, detached units. The cost of providing the deeper levels of affordable housing under the proposed inclusionary alternatives is also significantly higher than the cost of meeting the current Moderate-income requirements.

Per Square Foot Cost of Providing Inclusionary Units: Outside of Downtown

Detached UnitsAttached Townhomes and

CondosCost of Current Inclusionary Requirements

$24.86 to $29.00 $6.00 to $10.00

Cost of Alternative A Inclusionary Requirements $31.60 to $34.45 $16.23 to $20.25

Cost of Alternative B Inclusionary Requirements $36.09 to $38.08 $22.92 to $27.17

Accessory Dwelling Units (ADU)

The City’s current program permits inclusionary units to be not less than the size of the smallest market rate unit of the same product type and bedroom count.

Based on available data, inclusionary detached homes have been in the range of 1,600 to 1,800 square feet and inclusionary attached townhomes /condominiums have ranged from 1,400 to 1,600 square feet.

Inclusionary units are separately owned by income eligible households. Accessory dwelling units (ADUs) range from 500 to 700 square feet, smaller and less costly to build. They are also not separately owned by income eligible households. Because of these differences, ADUs are not comparable to inclusionary units and do not count toward the inclusionary unit requirement.

Other Jurisdictions’ Inclusionary Requirements and In-lieu Fee Provisions

City Inclusionary Percent Affordability Level In-Lieu Fee**Campbell 15% Low and Moderate $34.50Los Altos 15% Majority Mod and

some LowTBD

Santa Clara 15% Average 100% AMI Detached: $30 psf;Townhome $25 psf;Condo: $20 per sf

Cupertino 15% 50% Moderate, 50% Median

$17.82 psf for detached; $19.60 psf for small lot

San Jose* 15% Moderate Transitioning to $25 per sfMountain View

15% general15% to 20% for townhomes

Median for 15%;Moderate for 20%

$54.50 per sf;$125 per sf for townhomes

Sunnyvale 12.5% Moderate 7% of sales price****Palo Alto 15% < 5 acres;

20% > 5 acres2/3 Median; 1/3 Moderate

$77.62 psf;$51.75 psf for attached and condos

RECOMMENDATIONS:

1. Consider Alternative A, if the City Desires to Deepen the Level of Affordability. Inclusionary homes would be offered at prices based on 90% of the AMI (which would be affordable to households earning up to 100% of the AMI) and 110% of the AMI (which would be affordable to households earning up to 120% of the AMI). The blended average level of affordability would average 100% of the AMI.

2. Consider Establishing Two In-Lieu Fee Rates: One Rate for Townhomes / Condominiums and One Rate for Large Single Family Detached Homes, given the significant difference in unit size and corresponding price.

Desired Level of Inclusionary Requirement

Detached Units Attached Townhome and Condos

Downtown Project In-lieu Fee Schedule, Per SFCurrent Program (Prices at 120% AMI)

$19.30 $7.00

Alternative A (Avg. Blended Price at 100% AMI)

$23.00 vs. Current: $13.20 $13.50 vs. Current $13.20

Alternative B (Avg. Blended Price at 90% AMI)

Not Recommended

Outside of Downtown Project In-Lieu Fee Schedule

Current Programs (Prices @ 120% AMI)

$29.00 $10.00

Alternative A (Avg. Blended Price at 100% AMI)

$34.50 vs. Current $19.70 $20.30 vs. Current $19.70

Alternative B (Avg. Blended Price at 90% AMI)

Not Recommended

RECOMMENDATIONS:

3. Fee Levels to Encourage Inclusionary Units Rather than Payment of In-Lieu Fees

QUESTIONS? COMMENTS….

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NEXT STEPS

• Planning Commission June 8, Informational Item

• Recommendation to City Council August/September

HOUSING ENGAGEMENT EVENTS:

https://www.morgan-hill.ca.gov/2162/2021-Housing-Conversation

5:30 PM virtual community workshops:

• All Things Housing - Wednesday, May 19th recorded • State Mandates for Housing Production - Wednesday, June 2nd • Housing Affordability - Wednesday, June 16th

• Housing and Long-Term Sustainability - Wednesday, June 23rd

Additional events:

• Affordable Housing 101 in Spanish with English Translation - Tuesday, May 18th at 5:00 pm recorded

• A Model for Agricultural Workforce Housing in South County - Friday, May 28th at 10:00 am

• Creating Inclusive Communities through Design Form - Thursday, June 10th at 5:30 pm

• Hablando Vivienda con Nuestras Familias in Spanish with English Translation -Sunday, May 23rd recorded

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Morgan Hill Housing Conversationhttps://www.morgan-hill.ca.gov/2162/2021-Housing-Conversation